Should You Buy a House With Cash?
While the idea of avoiding mortgage payments may be tempting, you’ll miss out on some tax breaks and reduce your ability to invest elsewhere. (Piotr Powietrzynski/Getty Images)
In today’s low-inventory housing market, homebuyers are looking for any way to get a leg up on the competition when putting in an offer on their desired home.
If you have the means, an all-cash offer is a great way to fast-track a deal. A seller is more likely to accept your offer, and the success of the deal isn’t reliant on a lender’s OK following an appraisal. You’ll also own the home outright after the transaction with no mortgage to pay each month.
Cash transactions make up a minority of home purchases: All but just 14% of recent homebuyers financed their purchase, according to the National Association of Realtors’ 2019 Profile of Home Buyers and Sellers.
Two reasons to pay cash for your home are:
- Cash offers stand out.
- You can avoid taking on debt.
Cash Offers Stand Out
Especially in a market where homebuying is extremely competitive, an all-cash offer can provide the needed leg up to get the seller to consider your offer more seriously than others. You may not even be the highest bidder, but the seller knows a cash offer will make the closing process easier.
“All things being equal, it’s very likely that your offer would be the most attractive that they’d be considering with limited risk for the seller,” says Marcy Keckler, vice president of financial advice strategy for Ameriprise Financial.
If you want to set yourself apart from other buyers but still have a mortgage, you could use the cash to your advantage in the offer and then finance after closing. “You could differentiate yourself and get a loan later,” says Justin Vedder, chief operating officer of origination solutions at Altisource, a provider of transaction and management solutions to the real estate and mortgage industry. However, you wouldn’t want to make this part of your plan unless you know that your credit history and the market value of the house would guarantee an approved loan, or that you have enough cash if you can’t mortgage the property.
You Can Avoid Taking On Debt
By paying cash, you won’t have to make monthly payments to a lender, and when the house increases in value, that directly boosts your personal wealth.
It’s also important to remember that by financing, you take on additional costs with loan origination fees and the interest paid over time, so “your net cost of purchasing is going to be less if you’re paying cash,” Keckler says.
Even if you have enough cash on hand to purchase a home without a loan, is it always a good idea? Here are five reasons not to buy a home with cash:
- You need to maintain liquidity.
- You qualify for a favorable mortgage.
- Your money may be better invested elsewhere.
- You could capture a sizable tax break.
- There’s no guarantee home values will continue to increase.
You Need to Maintain Liquidity
It’s not wise to purchase a home with cash if you have just enough to pay for it. It’s a good idea to maintain an emergency fund that will sustain you for at least a few months if you were to lose your income. You’ll also want to have some cash on hand for any number of unexpected house needs, from a new roof to a furnace that’s on its last legs.
“It’s especially important that if you’re a homeowner that you have enough other money available to pay for things that might come up,” Keckler says.
You Qualify for a Favorable Mortgage
If you have enough cash to purchase a home outright, lenders will likely view you favorably for mortgage options. With a down payment of 20% or more, you don’t have to worry about mortgage insurance with a conventional loan, and you’re more likely to get a lower interest rate due to the fact that lenders see you as less likely to default on the loan.
First-time homebuyers aren’t just more likely to borrow money, but they’re more likely to borrow more since they don’t yet have equity in a house to help cover a down payment. This group, which makes up 33% of recent buyers, also tends to put less cash down in a purchase: The NAR report notes first-time buyers surveyed typically financed 94% of the home, while repeat buyers financed 84%.
“People are pretty comfortable with taking on debt,” Vedder says. He notes that younger generations’ familiarity with student loans and other financing make taking on a mortgage an easier choice than for older generations.
Following the recession’s historic lows, interest rates may be on the rise but remain low compared to previous decades. With enough cash to put down 20% on a home with a fixed-rate mortgage, you could keep a large portion of your assets liquid and pay 3.625% in interest, which is the average for a 30-year fixed-rate mortgage at Wells Fargo as of mid-November 2019. Plus, with the significant down payment, you can avoid paying private mortgage insurance. Compare that to October 1981, when mortgage rates hit an all-time high of 18.45%, according to FedPrimeRate.com.
Your Money May Be Better Invested Elsewhere
Even if you’re looking to buy a home outside a pricey metro area, with enough cash to pay for a home outright, you’re likely sitting on a pretty big pile of money. But the decision isn’t necessarily between buying a property outright or keeping money idling in the bank. Consider other forms of investment that may yield higher returns than the interest you’ll save by paying cash.
You could consider investing in stocks, mutual funds or a personal business you feel confident will bring greater returns. Keckler is quick to point out, however, that no investment is a sure thing. As with a home purchase, there is risk when investing your money anywhere.
You Could Capture a Sizable Tax Break
All homeowners with a mortgage can receive a tax break on the interest paid to the lender. “The interest (tax break) you accrue when you pay on the loan is huge,” Vedder says.
This benefit does apply to a small share of homeowners, however. Following federal tax reform passed at the end of 2017, the mortgage interest tax deduction has been limited to a total of $10,000. While residents in parts of the U.S. with particularly high local property taxes are affected by this measure, most homeowners in the U.S. do not exceed the $10,000 limit. In addition, increases to the standard deduction starting in 2018 made it so fewer people need to file itemized tax returns, which is where the mortgage interest deduction would occur. If you’re taking the standard deduction, you do not receive a separate mortgage interest deduction. The Urban-Brookings Tax Policy Center estimated in 2018 that the changes would reduce the number of homeowners who receive the deduction from 21% to 9%.
There’s No Guarantee Home Values Will Continue to Increase
Home prices are on the rise and are at an all-time high in many housing markets. Prices are expected to continue to rise in the near future at a slower pace, with signs of a slowing market already affecting larger metro areas. But if the housing market crash in 2008 was any indication, there’s no such thing as a guarantee in real estate.
“A lot of people feel that (because) the market fell out in 2008, putting all your money in your home is a big risk,” Vedder says.
Frequently Asked Questions About Buying a House With Cash
Is it better to buy a house with cash?
Whether you should pay with cash or finance your home purchase depends on your financial situation. Paying cash will make your offer more attractive to the buyer, and you will own the property outright. But if you don’t have the funds to pay for a house with cash, a mortgage can help you reach homeownership sooner.
Whether you decide to purchase your home with cash or take on a mortgage, go with what you feel most comfortable with. Keckler notes that zero financing might provide a greater sense of security emotionally, even if it’s not the same guarantee financially. “It may be a big sigh of relief to just know that you own the home outright and that you don’t have to worry about mortgage payments,” she says.
How long does it take to buy a house with cash?
Instead of taking a month to close for loan underwriting and approval, buying a house with cash can take just a few days. But you shouldn’t skip aspects of the due diligence process that lenders often require. An appraisal can help ensure you aren’t overpaying for the property, and an inspection will tell you what issues may exist in the home.
What are the closing costs if you buy a house with cash?
You won’t have a down payment, loan origination fees or points to cover at closing. While many closing costs become optional when there’s no lender to require them, paying for a title search and title insurance, inspection, survey and more can help reduce your chances of buyer’s remorse down the line.